An exchange-traded fund (ETF) is a type of investment fund that holds potentially hundreds, sometimes thousands, of investments such as shares or bonds¹, like a mutual fund.

But ETFs combine some of the features of mutual funds with those of individual shares. Like shares, they trade on an exchange, such as the London Stock Exchange, meaning they can be bought or sold at any time of the trading day at a known price (we explain how Vanguard trades ETFs later on). Mutual funds, on the other hand, are usually priced once a day.

ETFs are designed to track a particular index, such as the FTSE 100 or Bloomberg Global Aggregate Index² and offer a simple and low-cost way to hold a broad spread of shares or bonds.

Spreading your investments like this helps to reduce your risk, compared to owning just a handful of individual shares or bonds.

What’s the difference between an ETF and a mutual fund?

ETFs share many of the same characteristics as mutual funds. They pool investors’ money, which can bring cost benefits. Most are highly regulated, and any investor money is ring-fenced from the fund provider’s own assets.

But the key difference is in the way investors buy and sell ETFs. Unlike with mutual funds, where it is the fund provider who prices the fund and creates or redeems fund units to meet client demand, ETFs trade like shares on stock exchanges.

They trade throughout the day and have two prices that are shown on the stock exchange: an ask price (the price you buy an ETF for) and a bid price (the price you sell the ETF for). The difference between the two is called the ‘bid-ask spread’.

The price of ETF shares traded on the market depends on the supply of - and demand for - those shares as well as the value of the fund’s investments.

So, which is for you?

Our funds and ETFs tend to track different indices, so your first port of call may be to consider which index you actually want to invest in.

As already mentioned, ETFs are very similar to mutual funds, apart from the way they’re bought and sold. The other factor, and one that may be key in helping you make your decision, is cost.

Because ETFs are generally cheaper to run than regular funds, they can come with a lower ongoing fee. However, you may need to pay a stockbroker fee when you buy or sell them as they’re traded on the stock market.

At Vanguard, you can place an ETF trade at no additional cost which we then perform via “bulk dealing” - this is where we combine your trade with that of other investors and place bulk deals twice a day. Your order must be placed before the cut-off times of 10.15am or 2.10pm.

Alternatively, if you would prefer a live price, you can use our Quote & Deal service, charged at £7.50 per transaction. This is to cover our stockbroker costs.

ETFs and mutual funds can help you build a portfolio that is in line with your financial goals. Ultimately, we believe that long-term investing success is built on four simple principles:

By focusing on these principles – all areas which you can control – you can put yourself and your investments in the best position to achieve your goals.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

² The FTSE 100 Index is the largest 100 listed companies in the UK and the Bloomberg Global Aggregate Index is a flagship measurement of global investment grade debt. Investment grade bonds have a high-quality rating from third-party ratings agencies and are considered to be at a lower risk of default (in other words, the bond is more likely to be repaid at the end of the term).